As we noted in a recent corporate debt update on occasion of the troubles Neiman-Marcus finds itself in (see “Cracks in Ponzi Finance Land”), problems are set to emerge among high-yield borrowers in the US retail sector this year. This happens just as similar problems among low-rated borrowers in the oil sector were mitigated by the rally in oil prices since early 2016. The recovery in the oil sector seems increasingly endangered though.
Too many oil barrels are filling up again. Photo credit: Kay Nietfeld / DPA / Corbis – Click to enlarge
Here is a chart we have frequently shown in the past, which illustrates the y/y change rate in commercial & industrial loan charge-offs plus delinquencies in comparison to junk bond yields (the federal funds rate is added for good measure):
To avoid misinterpretations of this chart, note that the big surge in the rate of change of charge-offs/delinquencies obviously started from very low levels. In absolute terms it came nowhere near to the levels that were seen in 2008 – 2009. Both the increase in charge-offs and delinquencies and the improvement over recent quarters closely tracked the problems and subsequent recovery in the oil & gas sector as the oil price plunged from late 2014 to early 2016 and then rebounded.